Business and management

The geography of business

Global cities revisited

Oct 2nd 2013, 15:37by C.W.

IN 1991, Saskia Sassen, a sociologist, wrote her most famous work, “The Global City”. It argued that large, technologically advanced urban areas defined the modern world. Ms Sassen identified Tokyo, London and New York as the three cities that propelled the world economy. New research from the McKinsey Global Institute (MGI), the research arm of the consultancy, extends Ms Sassen’s work—and looks at where big businesses locate.

The big three are still dominant. There are 8,000 large companies—outfits with over $1 billion in annual revenue. About 53% are publicly traded, 37% are privately owned, and 10% are state-controlled. The most popular host city is Tokyo, where the headquarters of 613 companies are located. New York and London have 410 between them. Beijing, the emerging-market city with the most headquarters, has 116. In fact, three out of four large companies are based in developed countries—even though advanced economies account for only 14% of the world’s population and 64% of global gross domestic product.

But times are changing. The emerging world’s share of the Fortune Global 500, a list of the world’s biggest companies, increased from 5% in 2000 to 26% in 2013. In 2001 only 5% of outward foreign direct investment (FDI) flows were from countries that were not members of the OECD, a club of rich countries. But by 2011 their share of outward FDI increased to 21%. And these developments will continue. About one billion people in emerging-market cities will enter the global “consuming class” by 2025, according to the MGI.

Audio and Video content on Economist.com requires a browser that can handle iFrames.

As a result, there will be changes to the geography of big business. The hegemony of Tokyo, London and New York—and advanced economies as a whole—will wane. The MGI expects an additional 7,000 large companies by 2025—and most of the newcomers will be based in developing countries.

The number of headquarters in São Paulo is expected to triple by 2025. Beijing and Istanbul will have twice as many large companies. In 12 years’ time 46% of large companies will be headquartered in emerging markets. About 300 cities could host large companies for the first time by 2025—and more than 150 of these cities will be in the China region. In Western Europe, there will be just three newcomers.

The report also suggests that there will be strong growth in the number of companies’ foreign subsidiaries, alongside the growth in headquarters. Whereas the location of headquarters is usually pretty fixed—it would seem strange for Coca-Cola or McDonald's to move their base to France—subsidiaries are more footloose. Managers often choose the location. And so there is room for urban policy to make a big difference.

Low business taxes will not be the only factor that determines whether cities are good at attracting subsidiaries. And others, like market proximity and regulation, are less important to managers than people might think. Instead, McKinsey reckons that new subsidiaries will locate in cities with high “livability”.

At the moment liveable cities have a disproportionate number of foreign outposts. Sydney, famed for its high quality of life, has more than 54—more than even Tokyo. Singapore and Mexico City are other destinations of choice. For cities that hope to be big players in the world economy, attracting subsidiaries might be the most promising avenue.

In Ms Sassen’s book, Tokyo, London and New York were the undisputed kings. By 2025 things will look a little different. In addition, the big three were treated as reasonably similar places. The role of urban institutions was sidelined. But today cities cannot just be efficient places to do business—they also need to be good places to live. This is especially true if cities want to attract foreign subsidiaries. Liveability, not profitability, is the new vogue.